ECB unveils bank stress test plans as China’s bank write downs spooks the markets

Oct 23 • Mind The Gap • 1618 Views • Comments Off on ECB unveils bank stress test plans as China’s bank write downs spooks the markets

chinese-ghostThe timing couldn’t be more coincidental or ironic, just as Chinese banks announce significant write downs due to bad debts, The European Central Bank has announced details of a new ‘stress test’ assessment of the region’s key banks, in an attempt to assess the true quality of the banks’ balance sheets in the run-up to closer banking union. The tests begin in November, and will run for a year. It will see the ECB subject 128 banks to a series of risk assessment, asset quality review and stress tests. Full details are yet to be announced, banks will need to prove that at least 8% of their equity can be classed as ‘Tier 1’. The ECB;

“The exercise has three main goals: transparency – to enhance the quality of information available on the condition of banks; repair – to identify and implement necessary corrective actions, if and where needed; and confidence building – to assure all stakeholders that banks are fundamentally sound and trustworthy.”

 

Mario Draghi, ECB president, insists that the process will be clear, and effective:

“A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85% of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy.

Transparency will be its primary objective. We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets separately, the news that China’s biggest banks have tripled the amount of bad loans written off in the first half of 2013 triggered new fears over its ‘shadow’ banking sector.”

 

Chinese bank write offs send shivers down the spine of markets

The five biggest Chinese lenders wrote off a total of 22.1 billion yuan ($3.65 billion) of non-performing debt, nearly trebling up from the 7.65 billion yuan a year earlier, financial filings showed, leading to concerns that toxic debts in the Chinese financial sector are to be revealed soon. This follows reports that China’s central bank is holding back from injecting funds into money markets, pushing up short-term lending rates. As a result, China’s benchmark money-market rate jumped the most since July.

Fears of a liquidity clampdown in China, and fears of rising Chinese bad debt, hit shares across Asia as the recent stock market rally grinds to a halt. A rise in the value of yen also helped to drive the main indices into the red, causing a lower start in Europe.

 

US CEOs break pay record; the top 10 earners take home $100m+ each

If you’ve had a poor month of returns, possibly due to the standoff in the debt ceiling crisis, then I’m sure you won’t spare a thought for the top ten CEOs in the USA. For the first time in commercial history the 10 highest-paid chief executives in the US received more than $100m in compensation last year, two took home billion-dollar paychecks, according to a leading annual survey of executive pay.

Mark Zuckerberg, Facebook’s co-founder, was America’s highest-paid boss in 2012, according to GMI Ratings annual poll of executive compensation. Zuckerberg’s total compensation topped $2.27bn, over $6m a day. His base salary was $503,205, the vast majority of his enormous pay package came from exercising 60m Facebook share options when the company went public last year.

 

Bank of England raises growth forecast

The Bank of England has raised its forecast for UK economic growth in the second half of this year, with unemployment falling faster than it expected as the “robust” recovery gathers pace.

“The news on the month had continued to suggest a robust recovery in activity in the United Kingdom. Monetary stimulus remained considerable and confidence appeared to be rising. On their own, the business surveys were pointing to an increase in output of around 2% over the second half of the year, although the Bank staff’s latest projection was lower.

“Overall, Bank staff estimated that growth in the second half of the year would remain around 0.7% a quarter or a little higher, stronger than expected at the time of the August Inflation Report.”

 

Market snapshot at 10:15 am UK time

The Nikkei closed down 1.95%, Hang Seng closed down 1.36% and the CSI down 1.12%, Asian markets reacting badly to the news of bad debt write downs in China. European markets are all negative in the morning session; STOXX down 0.88%, FTSE down 0.44%, CAC down 0.73%, DAX down 0.48%. The IBEX index is down 1.63%, despite Spain exiting recession by announcing 0.1% growth this morning.

Commodities are mainly down in the morning session, ICE WTI oil is down 0.84% at $97.47 per barrel, NYMEX natural is up 0.28% at $3.59 per therm. COMEX gold is down 0.79% at $1332.00 per ounce with silver down 0.41% on COMEX at $1332.00 per ounce.

Looking towards the equity index futures the DJIA is down 0.55%, SPX down 0.62% suggesting that at the time of writing USA equity markets will open lower.

 

Forex focus

The yen rose 0.6 percent to 97.51 per dollar early in London after appreciating to 97.27, the strongest level seen since Oct. 9th. Japan’s currency advanced 0.9 percent to 134.09 per euro. The dollar rose 0.2 percent to $1.3752 per euro after declining to $1.3793, the weakest since November 2011. The yen climbed to the strongest level in two weeks against the dollar as the benchmark rate for funds available in China’s banking system jumped by the most since July, spurring demand for safer assets.

New Zealand’s dollar slumped by 1.3 percent to 84.03 U.S. cents, the biggest decline since Aug. 21st. Australia’s currency fell 0.7 percent to 96.44 U.S. cents. The New Zealand dollar tumbled the most in two months and Australia’s currency weakened as speculation China’s central bank is leaning toward tightening policy damped demand for higher-yielding assets.

The Canadian dollar fell 0.4 percent to C$1.0331 per U.S. dollar after reaching C$1.0332, the weakest since Oct. 17th.

 

Bonds

The benchmark U.S. 10-year yield slipped two basis points, or 0.02 percentage point, to 2.49 percent as of 8:30 a.m. London time it earlier touched 2.48 percent, the lowest level since July 23. The 2.5 percent note due in August 2023 rose 7/32, or $2.19 per $1,000 face amount, to 100 3/32. Treasuries rose for a second day, with 10-year yields dropping to the lowest level in three months, amid speculation the Federal Reserve will push back plans to trim its bond-purchase program.

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